FEB23005 Financial Markets in Practice

Short description:

In this course we discuss the organization and functioning of various financial markets. We will investigate price discovery through alternative trading systems (market micro structure), market conventions such as clearing and settlement procedures, interest rate and price formulas. Real world characteristics are used to reinterpret traditional textbook views of markets (i.e. the efficient market hypothesis).

Lastly, we will review some topics debated in the financial market literature. In particular, the nature and uses of interest rate forecasts, and stock market valuation.

Required reading:

No textbook for this course. Available textbooks usually include too much unused materials and a major objective of this course is to discuss how/why simplistic textbook models are not adequate descriptions of financial markets in practice. Suggestions for supplemental reading material are part of the lecture notes.

I provide these course materials (lecture notes, slides, etc.) because I think they may contain useful information for anyone interested in the particular topics. My teaching has never followed a particular single textbook, but covers a careful selection of materials from various sources (multiple textbooks and academic papers). Sometimes this yields material that is decidedly more difficult than most textbooks would accept, but I think empirically more correct and academically more insightful.

Period 2, November - December 2010

My written lecture notes for students contain the stories I tell and provide some more technical details and references.

These notes provide somewhat more technical explanations:

* Roll (1983) bid-ask spread model, LNFEB23005_1_BidAskSpread_Rollmodel.doc

* Case study on how in practice market microstructure peculiarities give rise to attempts of manipulation, LNFEB23005_1_DrEvil.doc

* Price discovery in a simulation model, LNFEB23005_1_TinicWest1979Simulation.doc

Exercises/assignments:

* Securities markets trading systems, bid-ask prices and limit order books

* Predictable price and return patterns that are not rejections of EMH, i.e. let us bury the random walk myth

* Examining interest rate forecasts (surveys) and forecast models (a Taylor rule model for monetary policy rates)

Selected key supporting literature: see attachment FEB23005-2010-11-lit.doc